Auto sales surge, but buyers may have loans longer than the cars

U.S. automobile sales are sizzling in part because Americans increasingly are taking out longer and longer loans to purchase used and new vehicles.

That U.S. consumers are unleashing pent-up demand after holding off on buying new cars is good news. But it may be a problem that many of these purchases are made with loans that stretch over long periods of time, many extending well beyond the four-year period when many Americans trade in their vehicles.

“We’re seeing a lot of subprime loans, loans that are over 10 percent interest and very long-term loans, as long as 72 months, which lowers the monthly payment,” said Michelle Krebs, the director of automotive research for AutoTrader.com.

Four-year car loans used to be the norm, which then became five-year loans. From April through June of this year, 41 percent of new-car loans were for financing largely about six years, according to data from the credit analysis firm Experian.

About 14 percent of used car loans were for periods between six and seven years, the Experian data shows.

“A lot of times the car dies long before they can pay off the loan, or there is an expensive repair that they can’t afford, so they trade it in,” said Rosemary Shahan, the president of the California-based consumer advocacy group Consumers for Auto Reliability and Safety.

“The loans are disproportionate to the value of the car. The car is a depreciating asset, and it is going to be worth even less as time goes on, and that negative equity gets rolled into the next loan.”

The long-term loans could result in snowballing debt.

“It’s something we keep an eye on,” said Melinda Zabritski, the senior director of automotive finance for Experian, which shared the quarterly data with McClatchy. “Consumers are certainly trying to keep the payments as low as possible in a market where vehicles are becoming more expensive.”

Business is booming for new-car sales, with projections of at least 16.3 million vehicles this year.

Beside lower monthly payments with longer term loans, another factor in those sales is pent-up demand. The average age of an American car or light truck on the road is 11.4 years, up from 9.8 years a decade ago. That suggests consumers had put trade-ins on hold, insecure about their jobs. Now they’re trading in those old cars.

“I think people are finally deciding to pull the trigger,” said Dennis Carlson, the deputy chief economist for the credit analysis firm Equifax. “Consumers who were on the fence feel now is a pretty good time to get a car.”

Debbie Lipman, 59, a hospital outreach specialist from Atlanta, is one of them.

“For the last one to two years, I had contemplated getting a new one,” she said. “I thought it would be nice to have a newer car, but it just didn’t make sense to go and spend money . . . when I had something that was perfectly functional.”

She traded in her 2004 Honda Accord for a new one, paying half in cash and financing the rest over 36 months at 1.9 percent.

Borrowers with weaker credit scores, however, pay higher interest rates, so they take on longer-term loans to bring down those rates, prompting concern that this kind of lending could end with a market crater, much like the mortgage-finance meltdown that began in 2007.

“There is a great debate about whether it’s a bubble and whether it’s going to burst,” said Krebs, of Autotrader.com, adding that on a key metric there’s no evidence of a problem yet. “The delinquency rate on car loans is very low.”

After several years of steering clear of riskier borrowers, lenders are again willing to loan to people with weaker credit histories.

Through the first five months of this year, according to Equifax, 4 in 10 loans that originated with car makers such as Ford or Toyota were subprime or higher-risk loans. These carry higher interest rates, reflecting greater risk that borrowers might miss payments.

Michael Campbell, 46, recently took out a loan with a high interest rate when he decided to replace his 2001 Chevrolet Malibu. The Burlington, Iowa, resident said he had an “average to low credit” score and had shopped a number of used car lots before settling on a 2007 Saturn Outlook. He put down cash and took a dealer-arranged loan at 10.99 percent for 42 months.

“I just get a loan and try to pay it off as quickly as I can, so I have an effective interest rate that’s lower,” said Campbell.

About 2.39 percent of auto loans were 30 days late during the second quarter of this year. Also, 0.62 percent of car loans were 60 days late, according to Experian.

Those delinquency rates are quite low, and automotive lending differs from mortgage lending in a key way: Lenders can quickly reclaim cars that have loans in default. Repossession companies come to a borrower’s home or work site, load the vehicle on a tow truck and take it back.

From April through June, 0.61 percent of vehicles with outstanding loans were repossessed. That’s a small number but still worrisome, because it was a jump of more than 70 percent over the first-quarter rate of 0.36 percent.